This is a recent post from Al Fin Energy commenting on the potential impact of falling oil prices on Russia’s economy. Russia needs a $125 per barrel crude oil price to meet its economic expansion plans. But lately oil prices have been going south putting in jeopardy the country’s future. Today, for example, the price of Brent crude is $109.50 and West Texas crude is $86.75.

Al Fin Energy

Friday, December 07, 2012

Russian Economy At Risk if Oil Prices Decline

The US shale boom has already hit Russia’s Gazprom hard. Now, the rising boom in US oil production, along with other sources of new global crude production, are casting a shadow across Russia’s grand plans for the future.

The Russian government requires an oil price of above $125 in order to achieve fiscal breakeven. That means that the Russian government is being forced to either postpone spending, or dip into cash reserves, as long as oil prices stay well below that level.

But now there is a very real risk that oil prices will dip from around $110 a barrel to below $90 a barrel. That would present a serious challenge — perhaps a catastrophe — to Putin’s ambitious and free-spending government.

“If the [oil] price is $80 per barrel, the budget deficit will widen to 3 percent of GDP,” Kudrin said.

“The figure of 3 percent is a critical boundary, beyond which we are likely to lose our country’s investment-grade rating,” he said.

Russia’s budget for 2013-2015 will run a deficit even with oil priced at $100 per barrel, he said. _Russia’s Oil Risk

Another startling bit of news out of Russia, is the big push to shale oil & gas production in Siberia. After all the rude talk from Putin, Gazprom, and other Russian authorities — telling the world how bad shale drilling and fracking is, and how pathetically irrelevant US shale production was — now Russia’s state oil company is taking the plunge into shale big-time:

ExxonMobil agreed to spend $300 million on advanced horizontal drilling and fracking at Russian state oil company Rosneft’s Siberian fields in a project designed to help Russia realise its vast tight oil potential.

The two companies will form a joint venture, split 51-49 between Rosneft and Exxon, to carry out the pilot programme and launch commercial production if they find sufficient oil in the Bazhenov shale and the nearby Achimov formations of Western Siberia.

The Bazhenov is the world’s largest source rock. However, Russia, still rich in conventional reserves, has yet to follow in the footsteps of the United States in deploying advanced horizontal drilling and hydraulic fracturing technologies, which is known as fracking, on a commercial scale.

With the core fields of Western Siberia in decline, however, the government of Russia, the world’s largest crude producer, has offered tax breaks for companies who drill into “tight” formations where hydrocarbons are trapped in non-porous rock. _Siberian Shale

There is always the chance that US President Obama will let his buddy Putin off the hook, of course. Obama’s EPA is chomping at the bit to shut down the US shale boom. Obama would make a lot of friends within the global faux environmental complex if he were to shut down the nascent US energy and economic boom. And such a move would make Putin a very happy man.

But Putin cannot count on that — given Obama’s ambivalent stance toward his own presidential legacy.

And so Russia sits in a type of limbo, trying to maintain world-class oil production utilising Soviet-era infrastructure — in the face of a demographic collapse of ethnic Russians, a continuing capital flight overseas, and an enervating brain drain and “womb drain” to freer lands abroad.